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Recent Developments in Retirement Plan Reform in the U.S. - Proposed Alternatives to Succeed the 401(k)-

Makoto Okubo 

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While Japan is preparing to introduce a 401(k) type plan modeled on the U.S. version, defined benefit plans in the U.S. are getting a strong boost from the stock market. Still, a large segment of the American society continues to undersave for retirement. Larger companies have been more prone to introduce 401(k) plans but smaller companies are less able to handle the burden. A simplified defined benefit plan called SIMPLE has gained some acceptance among smaller companies. However, because retirement benefits remain low compared to compensation levels of workers with long years of service, the promotion of defined benefit plans has been targeted by the Clinton administration as a major priority.

In addition to company sponsored retirement plans, the U.S. also has a personal retirement plan called IRA(individual retirement account). An IRA has an annual contribution limit of $2,000 depending on factors such as income level and participation in other retirement plans, and offers tax savings. Like the 401(k), owners can choose their investment options, and earn varying returns depending on the performance of investments. When workers change jobs, they usually transfer their 401(k) into an IRA called a rollover IRA. While less well known in Japan than the 401(k), the IRA is an important personal retirement savings plan with aggre-gate net assets exceeding that of 401(k) plans.



The tax reform of 1997 created the popular Roth IRA, which differs from a regular IRA in that contributions are non-deductible but withdrawals are tax exempt. Following its success, Congress is now deliberating on a Roth 401(k) plan proposal. The proposal would raise the maximum contribution for both the 401(k) plan and IRA, and ease eligibility restrictions. In addition, the Clinton administration has proposed, as part of its Social Security reform, a new personal retirement account called the USA plan that would cover most workers and provide matching contributions by the government. It has also proposed a simplified defined benefit plan for small businesses called the SMART plan. In this paper, we look at recent develop-ments in the U.S. regarding retirement plans following the 401(k) plan.


Makoto Okubo

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